Investment Highlights

• We maintain our HOLD call, forecasts and fair value of RM0.76 based on 8x FD FY21F EPS, in line with our benchmark forward target PE of 8x for small-cap construction stocks.

• Kimlun reported a net loss of RM3.1mil in 1HFY20 vs. our full-year net profit forecast of RM24.1mil and the full-year consensus net profit of RM26.2mil respectively. However, we consider the results within expectations as we expect Kimlun to turn around in 2H as it gradually optimises its operations under the new norms.

• As mentioned, Kimlun swung into a RM3.1mil net loss in 1HFY20 (vs. RM29.4mil net profit during the same period last year) as construction activities and exports of precast concrete products to Singapore came to a halt during the peak of the pandemic in Mar–May 2020. However, Kimlun had to continue to incur certain fixed overheads (such as wages, staff welfare, depreciation, equipment rentals, headquarters expense, etc), severely hurting its bottom line.

• Meanwhile, Kimlun has thus far in FY20F secured RM280mil new construction jobs (largely building jobs for residential property projects), boosting its outstanding construction order book to RM1.4bil (vs. its annual construction churn rate of RM800mil to RM1bil). Our forecasts assume construction job wins of RM450mil annually in FY20–22F, which represent a slight improvement over RM413mil achieved during a relatively drought year in FY19.

• Given the still elevated national debt, we believe the government has very limited room for fiscal manoeuvre, which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term, such as the MRT3 and the KL–Singapore high-speed rail.

• Already, S&P Global Ratings downgraded Malaysia’s outlook to negative from stable on 26 June 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus.

• We believe Kimlun’s valuations as a small-cap construction stock at 8–11x forward earnings are fair on muted growth prospects.

Source: AmInvest Research - 28 Aug 2020